by yuvaraja reddyLast Modified: January 10, 2018

SHARE

Sharing is caring! Share this article with your friends!

SHARE

CBSE Class 12 Commerce Accountancy Tools For Financial Statement Analysis : CBSE took the required steps and also provides a healthy and holistic school education, which gives students adequate space to develop physically and mentally. The board conducts research and based on that, it evaluates its syllabus and educational pattern. CBSE provides standard education to all and also promotes a state-of-the art environment that makes students vivacious and competent in all aspects. CBSE Syllabus is well-structured as several proficient subject experts are associated with this board. The syllabi of CBSE Maths, CBSE Science along with other syllabi are amended from time to time to make students up-to-date with current information so that they can meet all educational demands confidently.

The academics unit is formed with training, academic, Innovation and research unit of CBSE and it looks after some important fields to maintain its standard of education. This unit incorporates different policies and also monitors their operational activities to achieve academic excellence in all aspects. CBSE provides balanced academic structure and equal educational pattern to all its affiliated schools. The schemes of studies, academic guidelines and text materials are supervised by this unit in accordance with the acts and policies approved by the Government of India.

CBSE Class 12 Commerce Accountancy Tools For Financial Statement Analysis : Financial analysis tools are one of the most efficient ways that can be used for ensuring good profit from your investments. These financial analysis tools are highly helpful in evaluating the market and investing in a way so as to maximize the profit from the investments made. These financial analysis tools are useful for deciphering both internal and external information related to a specific business organization.

Financial Analysis is defined as being a process of identifying financial strength and weakness of a business by establishing relationship between the elements of the balance sheet and the income statement. The information pertaining to the financial statements is of great importance through which interpretation and analysis is made. It is through the process of financial analysis that the key performance indicators, such as, liquidity solvency, profitability as well as the efficiency of operations of a business entity may be known, while short term and long term prospects of the business may be evaluated. Thus, identifying the weakness, the intent is to arrive at recommendations as well as forecasts for the future of a business entity. Financial analysis focuses on the financial statements as they are a disclosure of a financial performance of a business entity. “A Financial Statement is an organized collection of data according to logical and consistent accounting procedures.

Applications of Financial Analysis Tools

Mainly, the financial analysis tools can be used for SWOT analysis. The term SWOT is short for:

S – Strength W – Weaknesses O – Opportunities T – Threats

The economic conditions in the present day market are analyzed by management professionals with assistance from SWOT analysis performed by the various financial analysis tools. Each section of the evaluation process contains specific information which is helpful in gauging the general performance of a company. Moreover, financial analysis tools are really important for any investor for the company’s performance shows direct impact on the price of a company’s stock.

Types of Financial Analysis Tools

There are different types of financial analysis tools available in the financial field. These tools are designed especially for carrying out specific functions. Among these different types of financial analysis tools, the Balanced Scorecard is one tool which can be of good assistance to gauge the financial position of a company (can be easily performed using Ready Ratios software). This financial analysis tool is helpful in subjective as well as objective measurement of special processes. Moreover, this financial tool is also helpful in evaluation of a company’s overall return, the operating income, and the capital financing processes.

Another important financial analysis tool is bench marking which is used for assessing the intrinsic strengths and weaknesses of a business organization. Besides, this also sways the stock price of the company. Also, there are some professional agencies which use this type of financial analysis tools to generate advice for their clients.

In addition to the aforementioned financial analysis tools, other important financial analysis tools include ratio analysis, trend analysis, comparative financial statement analysis or horizontal analysis, and common size statement analysis or vertical analysis.

CBSE Class 12 Commerce Accountancy Tools For Financial Statement Analysis : The previous article in the Financial Statement Analysis Series gave an introduction to the financial analysis and mentioned the various statements for analysis and the various users who would be interested in the same. In this article, we will take a look at the various tools and techniques used for doing the analysis. The articles to follow will focus on an elaborate discussion of the various financial statements and will further take up each tool and technique separately and explain them in detail as well.

Financial Statement Analysis is done in different ways using various tools and techniques. As discussed in the previous article, there are different users of financial analysis and they may be interested in some tools and techniques and uninterested in the others.

The various tools and techniques available for financial statement are mentioned below.

1. Comparative Financial Statement Analysis (Horizontal Analysis): As the name suggests, comparative analysis provides a year-on-year review of the various financial statements. For example, in the Income Statement, the Sales figure may be compared over a period of consecutive years to understand how the sales figures have grown (or declined) over the year. It should be noted that horizontal analysis compares the internal performance of the company.

Below is an example of a Comparative Income Statement.

Comparative Income Statement (All figures are in INR ‘000)

2. Common-size Financial Statement Analysis (Vertical Analysis): Vertical analysis is applicable for internal performance review as well as for comparison to peers and bench-marking. In vertical analysis all the items in a particular statement are represented as a percentage of a particular item. For example, Operating Expenses, Depreciation, Amortization, Profit before tax, Tax, Profit after tax, etc. may be represented as a percentage of Sales in the Income Statement. Common standard base can easily reveal the internal make-up of financial statements and any proportionate increase and decrease of the same.

Vertical analysis is also put to use for comparison across companies as financial statements are converted to common-size format, which can then be used to compare with competitor or industry averages, highlighting key differences which can then be analyzed.

Below is an example of a Common Size Income Statement. Values are expressed as %age of Revenue.

3. Ratio Analysis: Ratio analysis is the most widely used tool of financial statement analysis. A ratio gives relationship between two numbers, in this case items in the financial statements. Ratios are popular because they readily allow internal evaluation as well as comparison across firms. The ratios are categorized according to activities or functions they perform or the information they provide. For example, profitability ratios measure the profit making capability of the company.

4. Graphical Analysis: Graphs provide visual representation of the performance that can be easily compared over time. The graphs may be line graphs, column graphs or pie charts.

5. Trend Analysis: Trend analysis is used to reveal the trend of items with the passage of time and is generally used as a statistical tool. Trend analysis is used in conjunction with ratio analysis, horizontal and vertical analysis to spot a particular trend, explore the causes of the same and if required prepare future projections.

6. Regression Analysis: Regression analysis is a statistical tool used to establish and estimate relationship among variables. Generally, the dependent variable is related to one or more independent variables. In case of financial statement analysis, the dependent variable may be, say, sales, and it is required to estimate its relationship with the independent variable, say, a macroeconomic factor like Gross Domestic Product.

For example, in the Top Down approach of sales forecasting, an analyst would first forecast GDP growth and then establish a relationship between GDP and industry growth rate through regression analysis. He may then estimate the future sales growth based on the industry growth. As such, regression analysis is widely used in forecasting models.

The various tools and techniques are there to enable the decision making. It should be understood that any particular technique should not be viewed in isolation. Different companies may have different accounting methods and hence, comparison with peers has to be done carefully. Moreover, a holistic use of various techniques should be done to arrive at any conclusion.

Having understood how to do financial analysis, we need to further delve into the financial statements that are used to prepare this analysis. In the next article, we will take a look at the various financial statements that are used for the purpose of Financial Statement Analysis.